Both economic and financial analyses are carried out to assess infrastructure projects, to decide whether they are worth implementing. However, infrastructure projects do produce environmental effects whose impacts have to be investigated.
Different alternatives may be studied using one or several different approaches
mentioned in this chapter. It is not always easy to gather all the data required, nor
quantify all impacts in terms of monetary values. So, sometimes, proxies are
adopted. Despite the limitations to economic analysis of the environmental impacts
of development projects, it is important that such impacts be included in the
analyses. In many cases the techniques described can be extremely useful in
providing more accurate estimates of the value of the impacts of development on
the environment and, therefore, in generating more accurate and balanced appraisals
of the proposed projects.
8.1 Economic Measurement of Environmental Impacts:
Theory
Project evaluation relies on both economic and financial analyses. While financial
analysis concentrates mainly on market prices and cash flows, economic analysis
tries to (or must) include the costs and benefits of the impacts that the development
projects have on the environment, even if they are not reflected in the marketplace.
Financial analysis looks mainly at the project feasibility from the finance side. Do
the revenues/benefits exceed the costs of the project? Certainly, all investors would
like to recoup their investment. Any individual asks himself the same question
before he involves himself with any (and always, with a significant) expenditure.
However, economic analysis differs from financial analysis. In particular, welfare
economics concentrates on the overall welfare of society and assesses project
alternatives or activities based on changes in social welfare. This approach accepts
several significant conventions, including:
(i) Societal welfare is achieved by aggregating individual welfare;
(ii) Individual welfare can be measured (utility units called “utiles”) through the
prices negotiated for goods and services); and
(iii) Individuals can maximise their welfare by choosing the assortment of goods,
services and savings that yield the maximum amount of total utility, subject to
their income constraints.
When appreciating environmental impacts influenced by income constraints, the
following hypotheses have a significant importance:
(i) Even if goods and services are provided free of charge or sold at a minimum
cost, it is still possible to obtain the utility and welfare. The “consumer’s
surplus” or CS is represented by the difference between the total utility
obtained compared to the amount paid for a good or service. Total utility for
any good is given by the amount paid for the good plus any consumer’s surplus.
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8 Analysis of Environmental Impacts of Infrastructure
Different alternatives may be studied using one or several different approaches
mentioned in this chapter. It is not always easy to gather all the data required, nor
quantify all impacts in terms of monetary values. So, sometimes, proxies are
adopted. Despite the limitations to economic analysis of the environmental impacts
of development projects, it is important that such impacts be included in the
analyses. In many cases the techniques described can be extremely useful in
providing more accurate estimates of the value of the impacts of development on
the environment and, therefore, in generating more accurate and balanced appraisals
of the proposed projects.
8.1 Economic Measurement of Environmental Impacts:
Theory
Project evaluation relies on both economic and financial analyses. While financial
analysis concentrates mainly on market prices and cash flows, economic analysis
tries to (or must) include the costs and benefits of the impacts that the development
projects have on the environment, even if they are not reflected in the marketplace.
Financial analysis looks mainly at the project feasibility from the finance side. Do
the revenues/benefits exceed the costs of the project? Certainly, all investors would
like to recoup their investment. Any individual asks himself the same question
before he involves himself with any (and always, with a significant) expenditure.
However, economic analysis differs from financial analysis. In particular, welfare
economics concentrates on the overall welfare of society and assesses project
alternatives or activities based on changes in social welfare. This approach accepts
several significant conventions, including:
(i) Societal welfare is achieved by aggregating individual welfare;
(ii) Individual welfare can be measured (utility units called “utiles”) through the
prices negotiated for goods and services); and
(iii) Individuals can maximise their welfare by choosing the assortment of goods,
services and savings that yield the maximum amount of total utility, subject to
their income constraints.
When appreciating environmental impacts influenced by income constraints, the
following hypotheses have a significant importance:
(i) Even if goods and services are provided free of charge or sold at a minimum
cost, it is still possible to obtain the utility and welfare. The “consumer’s
surplus” or CS is represented by the difference between the total utility
obtained compared to the amount paid for a good or service. Total utility for
any good is given by the amount paid for the good plus any consumer’s surplus.
220
8 Analysis of Environmental Impacts of Infrastructure